Self-employed individuals, including freelancers, contractors, and sole traders, are responsible for paying income tax on their earnings. To ensure you pay the correct income tax and reduce your tax liability, it’s crucial to identify and claim allowable business expenses. In this comprehensive guide, we outline how to minimise your income tax as a self-employed professional and provide a list of deductible expenses approved by HMRC.
As a sole trader or freelancer, all income exceeding the personal allowance is subject to taxation. However, HMRC recognises that certain expenses are essential for running your business, and they allow you to deduct these from your gross income, reducing your taxable amount. These expenses are commonly referred to as ‘tax deductible.’ For example, if you earn £40,000 in revenue for the year and have £5,000 in allowable expenses, You also have a personal allowance (£12,570 in the 2023/24 tax year). Deduct both figures to find your taxable income, which would be £22,430 instead of £27,430 without these deductions.
Here’s a comprehensive list of the most common allowable expenses that you can claim to reduce your income tax liability:
1. Office Supplies: This includes stationery, printing costs, postage, phone bills, internet expenses, and software used for less than two years.
2. Office Equipment: Using cash-based accounting, you can claim expenses for business equipment like computer hardware, printers, and software used for over two years. Traditional accounting requires capital allowances for these items.
3. Business Premises: Expenses related to your premises, such as rent, business rates, utilities, insurance, maintenance, and security costs, can be claimed. However, if you purchase your premises, this cost is not deductible.
4. Transport: You can claim transportation and travel costs for work- related journeys, excluding travel to and from your workplace. Consult your accountant for expenses incurred for both personal and business reasons.
5. Legal and Professional Costs: Fees paid to professionals like accountants, financial advisers, solicitors, and bank charges for business purposes are deductible.
6. Raw Materials/Stock: Expenses for raw materials or stock used in your work can be claimed.
7. Marketing: Most marketing costs are considered allowable expenses.
8. Professional Insurance: Specialized insurances such as public liability and professional indemnity insurance are eligible expenses.
9. Clothing: Tax-deductible expenses include the unique clothing required for your job, such as uniforms or costumes.
10. Trade Subscriptions: Membership fees for trade bodies or professional organisations, as well as subscriptions to professional publications, can be claimed.
If you earn £1,000 or less per year from self-employment, you can qualify for the tax-free trading allowance, which allows you to forgo registering for self-assessment. However, if you expect significant expenses or wish to access certain benefits, registration may still be beneficial.
Under the traditional accounting method, longer-lasting business items like computers are considered capital assets, and you can claim capital allowances on them. However, many self-employed individuals prefer cash-basis accounting, commonly used by small businesses.
If your office is within your home, you can claim expenses such as heating, electricity, council tax, rent, internet, and phone usage, but only for the proportion used for your home office. Various methods exist to calculate this proportion, so consult your accountant for the most suitable approach to avoid over- or under-claiming. Simplified expenses are also an option, and all other business expenses can be claimed as usual.”
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